As Fenriswolf just said.
The ent_remove has to be put after the closing bracket of the while loop.
Code:

---

function move_torp1
{
	var bullet_speed; // this var will store the speed of the bullet
	var trace_coords;
	my.skill1 = 1;
	my.enable_entity = on;
   my.enable_block = on;
   my.enable_impact = on;
   my.visible = on;
	my.transparent = on;
	my.bright = on;
	my.passable = off;
	my.scale_x = 0.5;//scale it down to have it's size
        my.scale_y = my.scale_x;//same as scale x
        my.scale_z = my.scale_x;//same as scale x
        wait(1);
        c_updatehull(my,my.frame);
        wait(2);
        my.event = remove_torp1; // when it collides with something, its event function (remove_bullets) will run
	vec_set(my.pan, player.pan);
        vec_set(bullet_speed,nullvector);
	while (my.skill1)
 // this loop will run for as long as the bullet exists (it isn't "null")
	{
                bullet_speed.x = 40 * time_step;
		// move the bullet ignoring the passable entities and store the result in distance_covered
		c_move (my, bullet_speed, nullvector, ignore_passable);
		wait (1);
	}

	wait(1);
	ent_remove(me);
}

function remove_torp1() // this function runs when the bullet collides with something
{
  my.skill1 = 0; 
}

---

edit:
Added some stuff and correct some things, like the ; after the while(..)